entrepreneurVenture Studio: Benefits and Costs
Venture studio is when a group of people, typically led by one or two Managing Directors, sets up a shop where they provide significant hands-on help. Usually the idea being developed is complex enough to require a year or so to mature and seek external funding. In return, the venture studio gets on the order of 30% of the startup, which is higher than the norm for a pure-play early-stage investor.
If you are asking yourself how this is different from an accelerator or incubator or even EIR, fear note — the terms do get fuzzy, even among folks deep into the startup ecosystem. Here is a previous post discussing accelerator and EIR in more depth, what follows next are generally accepted differences. An accelerator will provide much less hands-on help and will typically be a 3-month program. Most of them but not all require co-location. An incubator is similar to an accelerator except the profit motive is weaker as they are usually set up by a university or government. Finally, an EIR is when a venture capital fund brings in someone usually with a proven track record to develop an idea within 9–18 months, while immersed in the network and deals of the firm.
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So how do you decide if a venture studio is right for you? It’s hard to argue for absolute pros and cons so the language we will use is of benefits and costs, with specific examples.
A venture studio is focused on ideas with a longer time-horizon. Many of them call themselves Ventures and will inject money too, but the core focus is hands-on support especially in technology and business development. VCs typically run on 10-year funds so they seek meaningful returns ideally within 7 years. For companies that would need a few more years, a venture studio’s value proposition is they can normalize the time frame so mainstream VCs will fund them.
Siri which ended up acquired by Apple was developed within SRI Ventures, effectively a venture studio. SRI Ventures is itself a Stanford spinout from the 1970s and also birthed billion-dollar companies like Intuitive Surgical and Nuance. In all these cases, at that time, these startups would have likely struggled to get funding and get product-market fit quickly enough. Unsurprisingly venture studios have been especially prevalent in healthcare where long sales cycle and regulatory oversight add a significant lag.
But healthcare is far from the only area, in fact the general principle is venture studios tend to abound in either technologically complex or emerging areas. As of writing this article, Playground Global (Andy Rubin, who co-founded Android) and AI Fund (Andrew Ng, who co-founded Google Brain) run similar venture studios focused on hardware and AI respectively.
A venture studio will typically only work with 2–3 startups at a time ie an order magnitude less than most accelerators. They will also take a significant portion of the company, the standard in Silicon Valley being 30%. In other parts of the world a founding investor (or “promoter” in South Asia) may play a similar role by being operationally involved. This typically dilutes the entrepreneur more than just a seed investor would take.
Also, a VC firm could get concerned there wouldn’t be enough equity to keep current and future employees incentivized enough. If you assume 30% for the venture studio, 20–30% for the series A investors and 10% for the employee stock option plan, then upon a series A founders are looking at owning less than half of the company. It is certainly reasonable considering the significant help the entrepreneur received to get to this stage, but it’s important to not compare yourself to the high-flying examples from consumer Internet.
Finally, if your competitors are VC-funded then a venture studio may be an unnecessary investment / cost. But the situation is different if you see very few competitors and/or that many strategies are involved with the current startups. If that’s the case it’s a strong sign that starting this particular idea is very hard and that you can benefit from a venture studio.
These are purposely short articles focused on practical insights (I call it gl;dr — good length; did read). I would be stoked if they get people interested enough in a topic to explore in further depth. All opinions expressed here are my own. If this article had useful insights for you do give a like, any thoughts comment away.